Comparison of Apple and Samsung - Essay Example

Comparison of Apple and Samsung Introduction A comparison between two publicly traded companies ly, Apple and Samsung has been given below. The comparison between the two companies is carried out with the help of ratio analysis and subsequent observation of financial statements of the two companies. The analysis gives a comparative overview of the businesses and size of Apple and Samsung, an insight of the liquidity and funding and efficient management of assets by the company. An analysis of the cash flow statements provide us with the sources and means of funds. The differences in accounting policies of the two companies could be understood along with their relative impacts on the published financial statements. A comparison of the stock prices provides us with the information on the relative investor confidence on the two companies. A comparative analysis of the two companies helps the investors to reach an investment decision on the common stocks of Apple and Samsung. Apple and Samsung: Financial ratio A comparison between two publicly traded companies Apple and Samsung could be done with the help of financial ratio analysis. The profitability ratio, liquidity ratio, investment value ratio and debt ratio has been taken into consideration for this comparison. The financial ratio has been determined by considering the financial statements of the two companies for the last two years. Return on assets (ROA) The return on assets of the two companies indicates the efficiency of management of its assets to produce profits. The detailed calculation on ROA is given below. Companies (2011) (Amounts in $) Samsung Apple Net Income 12,845,713,000 25,922,000,000 Total Assets 145,458,186,000 116,371,000,000 Return on assets (ROA) 8.83% 22.28%       Companies (2012) (Amounts in $) Samsung Apple Net Income 22,262,426,000 41,733,000,000 Total Assets 169,051,975,000 176,064,000,000 Return on assets (ROA) 13.17% 23.70% The return on assets for Apple is much higher with respect to Samsung. While Samsung produced an 8.83% return on assets in 2011, Apple registered an ROA of 22.28% in 2011. Apple focused to increase its asset base in 2012. The rate of increase in ROA for Samsung is more than that of Apple but the percentage return on assets for Apple is 23.70% which is more than 13.17% ROA for Samsung in 2012 (Bragg, 2012). Return on equity (ROE) The return on equity gives an indication of the efficiency of fund management by the companies to increase the wealth of the shareholders. The net income earned by the companies could be expressed as a percentage of the total equity of the company. Companies (2011) (Amounts in $) Samsung Apple Net Income 12,845,713,000 25,922,000,000 Total Equity 94,588,395,000 76,615,000,000 Return on equity (ROE) 13.58% 33.83%       Companies (2012) (Amounts in $) Samsung Apple Net Income 22,262,426,000 41,733,000,000 Total Equity 113,416,306,000 118,210,000,000 Return on equity (ROE) 19.63% 35.30% The return on equity for Apple is more than the return on equity for Samsung in the last two years. In 2011, Samsung achieved a return on equity of 13.58% as compared Apple’s return on equity of 33.83%. From the 2011 to 2012, rate of increase in ROE for Samsung is more than Apple. Despite that, Apple recorded an ROE of 35.30% in 2012 which is more than 19.63% ROE for Samsung. Asset turnover A comparison of the asset turnover of Apple and Samsung provides a measure of utilization of assets of the two companies. Asset turnover indicates the amount of revenue generation of the company in multiple of its asset base. Companies (2011) (Amounts in $) Samsung Apple Revenue 154,048,895,000 108,249,000,000 Total Assets 145,458,186,000 116,371,000,000 Asset Turnover 1.06 0.93       Companies (2012) (Amounts in $) Samsung Apple Revenue 187,754,283,000 156,508,000,000 Total Assets 169,051,975,000 176,064,000,000 Asset Turnover 1.11 0.89 The asset turnover of Samsung is more than that of Apple. In 2011, Samsung had an asset turnover of 1.06 which was more than 0.93 for Apple. In 2012, the asset turnover of Apple further decreased to 0.89 while Samsung has been able to increase its asset turnover to 2012. This shows that Samsung has a proportion of sales with respect to its asset base while the revenue earnings of Apple is less than the asset size of the company. Days’ receivables A comparison of the day’s receivables for Samsung and Apple provides an indication of how fast the companies are able to collect the amount due on account of its credit sales. In absence of credit sales, the total sales have been taken into consideration to calculate the days’ receivable. Lower value of days’ receivables indicates that the company does not require much time to collect its payments and gives a measure of efficiency of its clients. Companies (2011) (Amounts in $) Samsung Apple Accounts receivable 22,549,741,000 13,731,000,000 Total sales 154,048,895,000 108,249,000,000 Days receivable 53.43 46.30       Companies (2012) (Amounts in $) Samsung Apple Accounts receivable 24,903,927,000 21,275,000,000 Total sales 187,754,283,000 156,508,000,000 Days receivable 48.41 49.62 In 2011, the days’ receivables for Samsung was 53.43 which is higher than 46.30 for Apple. In 2012, the day’s receivables for Samsung reduced to 48.41 while the days’ receivables for Apple increased to 49.62 (Maguire, 2007). Inventory turnover The inventory turnover of the two companies gives a comparative picture of how fast the inventories are sold during its entire period of revenue earnings on annual basis. A high value of the inventory turnover shows that the inventories are not held for long and are turned over or sold a number of times in the total sales volume. Companies (2011) (Amounts in $) Samsung Apple Sales 154,048,895,000 108,249,000,000 Inventory 14,673,434,000 776,000,000 Inventory Turnover 10.50 139.50       Companies (2012) (Amounts in $) Samsung Apple Sales 187,754,283,000 156,508,000,000 Inventory 16,569,333,000 791,000,000 Inventory Turnover 11.33 197.86 The inventory turnover of Apple is more than 10 times the inventory turnover for Samsung. In 2011, the inventory turnover for Samsung was 10.50 which increased to 11.33 in 2012. On the other hand the high value of inventory turnover for Apple increased at a much faster rate from 139.50 in 2011 to 197.86 in 2012. This shows that Apple has been able to sell its inventory faster than Samsung in the last two years. Debt ratio The debt ratio tells us the amount of total assets present with a company that could be utilized to service the total liabilities. A comparison of the debt ratio for Apple and Samsung is given below. Companies (2011) (Amounts in $) Samsung Apple Total assets 145,458,186,000 116,371,000,000 Total liabilities 50,869,791,000 39,756,000,000 Debt Ratio 2.86 2.93       Companies (2012) (Amounts in $) Samsung Apple Total assets 169,051,975,000 176,064,000,000 Total liabilities 55,635,669,000 57,854,000,000 Debt Ratio 3.04 3.04 The debt ratio for Apple in 2011 was 2.93 which are more than 2.86 for Samsung. This means that Apple has 2.93 times assets as compared to liabilities to be serviced. Samsung is close with maintaining 2.86 times assets as compared to its liabilities to be serviced. In 2012, both the companies are maintaining equal debt ratio. Days’ payable A comparative analysis of the days’ payable for Apple Inc and Samsung Electronics shows the number of days required by the companies to make payment to the creditors. It is better for companies to have higher days’ payable as compared to its days’ receivables. Companies (2011) (Amounts in $) Samsung Apple Accounts payable 17,280,823,000 23,879,000,000 Cost of sales 104,700,887,000 64,431,000,000 Days Payable 60.24 135.27       Companies (2012) (Amounts in $) Samsung Apple Accounts payable 15,768,229,000 32,589,000,000 Cost of sales 118,244,730,000 87,846,000,000 Days Payable 48.67 135.41 The days’ payable for Apple is much more as compared to the days’ payable for Samsung. This means that apple takes much more time than Samsung to pay its creditors. This could also indicate the credit period allowed by its creditors. In 2011, the days’ payable for Samsung is 60.24 which are much less as compared to 135.27 for Samsung. In 2012, the days’ payable remained more or less equal for Apple while the days payable reduced to 48.67 for Samsung. Current ratio The current ratio of the two companies Apple and Samsung provides a comparative picture of the amount of current assets available with the companies in order to service the short term liabilities. This explains the position of liquidity of the two companies. Companies (2011) (Amounts in $) Samsung Apple Current assets 66,755,731,000 44,988,000,000 Current liabilities 41,377,102,000 27,970,000,000 Current ratio 1.61 1.61       Companies (2012) (Amounts in $) Samsung Apple Current assets 81,476,069,000 57,653,000,000 Current liabilities 43,817,619,000 38,542,000,000 Current ratio 1.86 1.50 In 2011, the current ratio for Apple and Samsung was same at 1.61 which means that both the companies maintained equal multiples of short terms assets with respect to their respective short term liabilities to be serviced. In 2012, the current ratio for Samsung increased to 1.86 while the current ratio for Apple decreased to 1.5. This shows that Samsung has focused more on achieving short term growth. Quick ratio A comparison of the quick ratio of the two companies reveals the dependence of the two companies on their respective inventories to service their short term liabilities. A higher quick ratio indicates lesser dependence on the inventories of the company in order to service their short term liabilities. Companies (2011) (Amounts in $) Samsung Apple Current assets 66,755,731,000 44,988,000,000 Current Liabilities 41,377,102,000 27,970,000,000 Inventory 14,673,434,000 776,000,000 Quick ratio 1.26 1.58       Companies (2012) (Amounts in $) Samsung Apple Current assets 81,476,069,000 57,653,000,000 Current Liabilities 43,817,619,000 38,542,000,000 Inventory 16,569,333,000 791,000,000 Quick ratio 1.48 1.48 In 2011, Samsung was more dependent on its inventories as compared to Apple for servicing their short term liabilities. The quick ratio for Samsung in 2011 was 1.26 while Apple had a quick ratio of 1.58. In 2011, Samsung improved its quick ratio to 1.48 which was same as the Apple in 2012. Price earnings ratio Companies (2012) (Amounts in $) Samsung Apple Price per share 1,532.70 482.85 Earnings per share 143.80 44.64 Price to earnings ratio 10.66 10.82 The price to earnings ratio of the companies denotes the amount of price that the shareholders are ready to pay for earning of each unit of the company. The share prices of the companies may vary but the price to earnings ratio is a standardized value that denotes the comparative value of shares of the company in the market. The above table indicates that the price to earnings ratio for Apple is slightly higher than Samsung in 2012. Although the per unit share price of Samsung is much higher than Apple, it has a lower value of price to earnings ratio as compared to Apple. This shows that the shares of Apple are in high market demand as compared to the shares of Samsung. The investors are ready to pay more for buying each share of Apple as compared to that of the Samsung share. Apple and Samsung: Brief overview of the two companies and their business Apple Inc. is an American multinational company headquartered in California. It is the second ranked in terms of revenue generation and is placed next to Samsung. The company is the third ranked mobile phone maker across the world. Apple Inc.’s business areas involve design, development, marketing and sale of electronic products and computer software and hardware. The key products of Apple include hardware products, i-pad tablet computers, i-phone smart-phones, i-pod music player, operating systems i-OS, etc (Apple Inc, 2013). The products of apple Inc. are priced a bit higher as compared to its competitors and also the products offer better user experience. The middle-upper class segment who are ready to pay slightly more for enjoying added features of the consumer electronics and information technology are the target customers of Apple Inc. Apple has its worldwide presence through approximately 394 stores in fourteen countries. A total of 76000 have been employed by Apple Inc. throughout the world. Out of the total workforce, 95% of them are permanent and full time employees of the organization. In May, 2013 Apple Inc. reached the top ten of the Fortune 500 companies in the world which is a remarkable achievement that is reflected from the financial statements. In 2012, Apple Inc. earned revenues of $156bn with a net income of $41bn. Samsung is the only company that has exceeded the revenue earnings of Apple Inc. in 2012. Samsung is the world leading company in information technology and has earned revenue of $187bn in 2012 with a net income of $22.26bn in 2012. Samsung is multinational South Korean company with a large number of affiliates and subsidiaries operating under its brand. Apart from electronics and information technology, Samsung’s other areas of business include hardware, shipbuilding, life insurance, construction, etc. The business of information technology is the most flourishing business of the group. The business includes design and development, sale of electronic gadgets, computer software, hardware, mobile phones, music systems, etc. The market of smart-phones has been targeted by Samsung in competition with apple Inc (SAMSUNG, 2013). Samsung has its presence in several countries all over the world providing innovations in information technology and consumer electronics. The group employs over 369000 employees working for the company all over the world. Similarities and differences The similarities and differences between Apple Inc. and Samsung could be explained by analyzing the financials of the two companies for the last two years. An analysis of the financials helps to understand their comparative sizes, the methods of funding adopted by the organizations, the liquidity status of the companies, and the trend of stock prices. A vertical analysis given below shows that Apple has increased its net income from 23.95% to 26.67% of its revenues while Samsung has increased its net income from 8.34% to 11.8% of its total revenues. A vertical analysis of the both the company’s balance sheet parameters reveal that both Samsung and Apple are heavily funded by their equity with the equity ownerships of both the companies being above 65% in 2011 and 2012 (Periasamy, 2009). Income Statement parameters Vertical Analysis   Vertical Analysis Company ($) Period Ending 29-Sep-12   24-Sep-11   Apple Total Revenue 156,508,000,000 100% 108,249,000,000 100% Apple Net Income 41,733,000,000 26.67% 25,922,000,000 23.95% Balance Sheet parameters Vertical Analysis   Vertical Analysis Company Period Ending 29-Sep-12   24-Sep-11   Apple Total Current Assets 57,653,000,000 32.75% 44,988,000,000 38.66% Apple Total Current Liabilities 38,542,000,000 21.89% 27,970,000,000 24.04% Apple Total Assets 176,064,000,000 100% 116,371,000,000 100% Apple Total Equity 118,210,000,000 67.14% 76,615,000,000 65.84% Income Statement parameters Vertical Analysis   Vertical Analysis Company ($) Period Ending 29-Sep-12   24-Sep-11   Samsung Total Revenue 187,754,283,000 100% 154,048,895,000 100% Samsung Net Income 22,262,426,000 11.86% 12,845,713,000 8.34% Balance Sheet parameters Vertical Analysis   Vertical Analysis Company Period Ending 29-Sep-12   24-Sep-11   Samsung Total Current Assets 81,476,069,000 48.20% 66,755,731,000 45.89% Samsung Total Current Liabilities 43,817,619,000 25.92% 41,377,102,000 28.45% Samsung Total Assets 169,051,975,000 100% 145,458,186,000 100% Samsung Total Equity 113,416,306,000 67.09% 94,588,395,000 65.03% The positions of liquidity are determined by their net working capital as a difference between the current assets and current liabilities of the company (Koen and Oberholster, 1999). The vertical analysis given above shows that Samsung maintained a more liquid position in short term as compared to Apple. An analysis of the monthly stock prices of the two companies can be described by the following figures. Company Average return Standard deviation Apple 1.34% 2.64% Samsung 0.08 0.08 Based on the past trend of stock prices for the last two years, Apple Inc. has produced an average return of 1.34% which is less than the average return of 2.64% of Samsung. The risk associated with the stock returns are, however, same for both the companies which is represented by their standard deviation of 0.08. Observations From the comparative performance of the companies and the prices of stocks, it was observed that the stock prices of Apple Inc was more volatile than the stock prices for Samsung in the last two years. The fluctuation of the stocks of Apple Inc in terms of upward and downward movements was more as compared to Samsung. The movement of the stocks of the two companies are given below which also represents the reaction of the market investors to the performance of the two companies. The minimum as well as the maximum return offered by the investments in Apple were more than Samsung (Kettell, 2002). While the least return offered by Samsung was -12.88% and a maximum return of 15.24%, Apple Inc. offered a minimum return of -14.41% and a maximum return of 18.83%. Thus the performance of Apple Inc. is more volatile as compared to Samsung for which the expected return of Apple Inc. is more than Samsung (Harder, 2010). Analysis of Cash flow statements An analysis of the consolidated cash flow statements reveal that Samsung have focused on short term growth prospects in 2012. This is evident as the cash inflows from operating activities have increased from $21.3bn in 2011 to $35.4bn in 2012. This has been achieved by focusing on short term investments for which the repayment and interest payment of the company have also increased. In 2012, the cash outflow increased to $29.2bn from $19.7bn in 2011. As a result of increased borrowing and short terms interest and loan repayments, the cash outflow due to financing activities increased to $1.7bn in 2012 from a net inflow position in 2011. A similar cash flow position is also observed for Apple Inc. although the rate of increase in short term investments are slower than its competitor. The net cash inflow for Apple Inc. increased from $37.5bn to $50.8bn. The short term investments of the company have been increased that resulted in increase of net cash outflow from $40.4bn to $48.2bn. Due to increase in payment of interest and repayment, the net cash outflow of the company has also increased to $1.7bn as compared to a net inflow position in 2011. Thus the year under analysis witnessed increase in short term investment and acquiring short term finances for growth of both the companies (Bragg, 2012). Accounting policy difference and their impacts The accounting policies are a set of guideline, policies, rules and regulations that need to be followed for correct representation of accounting and financial statements. Samsung and apple are two multinational companies headquartered in South Korea and US respectively. Thus there exists a difference in accounting policy of the two firms which has imminent impacts on the financial disclosures. The accounting policies of Samsung are based on the Korean International financial reporting standards as the company needs to consolidate the financial statements of all its subsidiaries and affiliates across the world. The accounting policies of Apple Inc. are based on the US Generally Accepted Accounting Principles. Apart from that the company is also required to the Sarbanes-Oxley Act introduced to enforce true disclosure of financial information. The accounting policies impact the financial statements and decision making of the investors. True financial disclosures are aimed at protecting the interest of the investors. The inventories of Samsung are evaluated using the average cost method while the materials in transit are represented by the actual cost. The valuation of inventories for Apple Inc. is done on the basis of net realizable value. Recommendation: Investment comfort of personal assets in the two companies The analysis of the performance of the two companies and the trend of stock prices over the last two years is useful in taking a decision for investment in personal assets of the two companies. Both Apple Inc. and Samsung have focus on short term investments for which have acquired current liabilities in an aggressive manner over the last two years. The companies, however, registered an increase in the return on assets as well as in the return on equity. The return achieved by Apple Inc. is more than the return achieved by Samsung. Samsung on the other hand have shown a higher rate of increase in their return to the shareholders. Thus both the companies have performed well in different financial parameters and show a positive expected performance in future. Since the volatility of the stocks of Apple Inc. is more than that of Samsung, the expected return from the Apple stocks would be more (Dimson, 1988). This could be observed from the price to earnings ratio as the investors are willing to pay more for each unit earning of the companies. Thus investment of personal assets in the two companies is comfortable looking at the future growth prospects. Conclusion A comparative analysis of the performance of Apple Inc. and Samsung shows that the companies have certain similarities and dissimilarities in terms of their business policies and approach for short term and long term growth. Apple and Samsung are the two leading information technology companies having different market segments. Apple Inc products are comparatively high priced are intended for customers who are enthusiastic and ready to pay slightly more for better user experience. Although the revenue generated for Samsung is more than the revenue of Apple Inc., the return on assets and equity for apple is more than Samsung. On the other hand, Samsung have brought in innovative technologies to compete in the smart phone market of Apple. Although the average return offered by the Samsung stocks is more than the Apple, the investors anticipate higher returns from the apple stocks for which they are ready to pay more for each unit of earning of Apple Inc. This is evident by a comparative observation of price-earnings ratio of the two companies. References Apple Inc. (2013). Product Feedback. Retrieved From: http://www.apple.com/feedback/. Bragg, M. S. (2012). Business Ratios and Formulas: A Comprehensive Guide, New Jersey: John Wiley & Sons. Bragg, S. M. (2012). Financial Analysis: A Controllers Guide. New Jersey: John Wiley & Sons. Dimson, E. (1988). Stock Market Anomalies. Great Britain: CUP Archive. Harder, S. (2010). The Efficient Market Hypothesis and Its Application to Stock Markets. Germany: GRIN Verlag. Kettell, B. (2002). Valuation of Internet and Technology Stocks: Implications for Investment Analysis. UK: Butterworth-Heinemann. Koen, M. and Oberholster, J. G. I. (1999). Analysis and Interpretation of Financial Statements. South Africa: Juta and Company Ltd. Maguire, M. (2007). Financial Statement Analysis. Germany: GRIN Verlag. Periasamy, P. (2009). Financial Management, 2E. India: Tata McGraw-Hill Education. SAMSUNG. (2013). The Most Powerful Smartphone Yet. Retrieved From: http://www.samsung.com/in/business/business-products/mobile-devices. Read More